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Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
Valuation Workshop by  Anand Lunia and Shailesh V Singh 23 Jul 2011 v2
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Valuation Workshop by Anand Lunia and Shailesh V Singh 23 Jul 2011 v2

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  • The first thing to understand about VC ’s is that they’re not investing their own money. Venture capitalists start by raising money from a bunch of investors, and then distribute it to various startups. But the investors are expecting to get their money back, generally within 10 years of committing it to the fund.
  • Transcript

    • 1. An Introduction To Venture Capital Anand [email_address] Shailesh [email_address]
    • 2. Agenda Saturday, July 23 rd , 2011
      • The Billion Dollar Club?
      • What is Venture Capital?
      • Valuation Methodologies
      • Valuation in Venture Capital
      • Structuring a Fund
      • Case Study: MMT
    • 3. The Billion Dollar Club
    • 4. The Billion Dollar Club Airbnb  is  definitely in the club . The crowdsourced marketplace for turning your apartment into a hotel for a night grew  800 percent  last year in nights booked to 800,000. There are currently 60,000 listings, and bookings keep growing by 40 to 50 percent a month.  Sublets are next .
    • 5. The Billion Dollar Club Square  is also  in the club . It is raising at least $50 million. Square passed 500,000 card readers and  1 million transactions  in May, and is processing more than  $3 million a day  in mobile payments. COO  Keith Rabois   told us at Disrupt NYC that Square will do $1 billion in transactions this year, and he thinks it could ultimately do  better financially than Paypal  (where he was an early executive). 
    • 6. The Billion Dollar Club Dropbox , the Y Combinator file-sharing startup that only ever raised  $7.2 million  might end up with the largest valuation in the club, perhaps as high as $1.5 billion or $2 billion. It’s just growing like crazy, with  25 million users  saving 200 million files daily. That’s up from  4 million users  18 months ago.
    • 7. The Billion Dollar Club Gilt Groupe  is already in the club. It closed a  $138 million round  at about a $1 billion valuation last May. One of the first companies to introduce online flash sales in the U.S., Gilt is on track to do $500 million in revenues this year and has expanded from fashion to  food ,  travel ,  local deals , and more.
    • 8. The Billion Dollar Club Gilt Groupe  is already in the club. It closed a  $138 million round  at about a $1 billion valuation last May. One of the first companies to introduce online flash sales in the U.S., Gilt is on track to do $500 million in revenues this year and has expanded from fashion to  food ,  travel ,  local deals , and more.
    • 9. The Billion Dollar Club Just above this group, is Pandora (which just went public with a  $2 billion  market cap), LivingSocial (with a  $3 billion  valuation), LinkedIn (already public, with a  $6.3 billion  market cap), Twitter (which is worth anywhere from  $3.7 billion  to  $10 billion ), Zynga (which will be worth north of  $10 billion when it goes public), Groupon (which could be worth more than  $25 billion ) and Facebook (which is already worth  $50 billion  and could go as high as $100 billion by the time it IPOs).
    • 10. Apple
    • 11. The Billion Dollar Club-Google
    • 12. Multiples will change with maturity
    • 13. What is Venture Capital?
    • 14. Private Equity & Venture Capital
      • “ Private Equity ” means capital to companies not quoted on a stock market, in exchange for an equity participation
      • Venture Capital (VC) is a sub-class of Private Equity characterized by investments made for the purpose of developing, launching, and expanding new products or service offerings
    • 15.
          • Seed Fund
          • Venture Capital
          • Buyout / Leveraged Buyout
          • Growth Capital
          • Special Situation Funds
            • Stressed Asset
          • Real Estate Fund
          • Infrastructure Funds
          • Secondary Funds
      Type of Alternative Investment Class
    • 16. Source : Erasmic Fund Fund Raising Pattern – Life Cycle of a Startup
    • 17.
          • Higher returns
          • Risk capital
          • Technology driven ?
          • Capital efficiency
          • Unlisted companies / PIPE
      Key Attributes
    • 18. How VC ’s work Investor Investor Investor VC fund Investor Startup Startup Startup
    • 19.
      • Fee Structure : 2 :20 model
        • During commitment period
        • Post commitment period
      • Draw down schedule
        • Duration
        • Fund amount
      • Alignment of interest
        • Carry structure
        • Claw back provision
      Deal Structure
    • 20. Attributes of a Great VC Fund
      • • Bets on people not trends
      • • Driven by the big idea
      • • Looking for a ‘Winner’
      • • Not afraid of failure
      • • Understand how to manage a portfolio of risk
      • • Serves as a fantastic coach
      • • Does her best work outside of the board room
      • • Not waiting for validation from other VCs
    • 21. In the VC’s Mind
      • • Is this the right team?
      • • What’s the entrepreneur's motivation?
      • • Is this a billion dollar opportunity?
      • • Is it a game changer?
      • • How competitive is the space?
      • • How defensible is the product?
      • • How much is this thing going to take?
      • • How long to maximize value and exit?
    • 22. Stages of Investment
    • 23. Stage vs. Return
    • 24. In the VC ’s mind
      • IRR (Internal Rate of Return)
        • Company ’s Current and Future Valuation
          • Comparables (P/E,P/S,…), “Number of”, DCF, …
        • What ’s The Best Strategy To Create Value
          • Which are the achievable milestones and what ’s the financing needed ?
          • When is the break-even expected ? With which margins and revenues.
        • Exit Strategy
          • Trade sale, IPO, N th +1 round of financing, ..
      • Minimizing Risks
        • Diluting the investment
        • Liquidation Preference rights
    • 25. Valuation Methodologies
    • 26. Factors Captured in Valuation
      • Time Value of Money – Value of dollar today vs. tomorrow
      • Risk of Cash Flows – Certainty of cash flows
      • Growth Potential of Cash flows – Future potential of business
    • 27. Valuation Methodologies
      • Two main valuation methodologies:
        • Discounted Cash Flow Analysis (“DCF”)
          • Current value based on internal cash flows projections
          • Adjusts for risk and time value of money
        • Multiples
          • Useful in comparing similar companies
          • Captures operating and financial characteristics (e.g. expected growth) in a single number that can be multiplied by some financial metric (e.g. EBITDA) to yield an enterprise or equity value
          • Expressed as a ratio
    • 28. Discounted Cash Flow Analysis
      • Current Value based on Discounting Projections
      • Key Components:
        • Free Cash Flow
        • Terminal Value
        • Discount Rate
      • This method works very well for businesses with stable cash flows (i.e. infrastructure, mature businesses)
      • For start-ups, however, a DCF does not work as well due to: the volatility of cash flows and difficulty it's often impossible to model revenue correctly, let alone cash flow, and terminal value
    • 29. DCF Example – Company A
    • 30. Multiples
      • Multiples can be applied to a company’s financial metrics from two sources:
        • Comparable Companies:
          • Implied value in the public markets by analyzing similar companies' trading and operating metrics
          • Depends on the level of comparability of the selected publicly traded companies
          • Does not include a "control premium"
        • Precedent Transaction Analysis:
          • Multiples derived from comparable precedent M&A transactions
          • Reliability depends on the number of precedent transactions and their levels of comparability
          • Market cycles and volatility impact on historical
          • Individual buyer synergies and structure of transaction will also impact multiples
    • 31. Commonly Used Multiples
      • Price / Earnings (“P/E”) – stable services company
      • P/E/G (“PEG Ratio”) – extension of P/E; best for fast growing company
      • Price / Sales (“P/Rev”)* - brand, negative cash flows
      • Price / Book Value (“P/BV”) – banks, insurance
      • TEV / EBITDA – removes the affect of capital structure
      • * Note – in companies with debt, enterprise value is used, where equity + debt equals enterprise value
    • 32. Valuation in Venture Capital
    • 33. VCs imperative- 10X in each deal
      • The “Portfolio Effect”
        • Out of Ten Start-ups Funded, with Re 1 each,
          • 2 successes at 10x or better 20
          • 5 ‘OK’ returns at 1.5x to 4x 10
          • 3 write-offs, total loss of invested money 0
          • Total Gains on Investment of Rs 10 30
      • Venture Capital is fundamentally an institutionalized form of aiming for Outliers!
      • Do we know which one is 10X? We expect each one to be 10X, and then pray
    • 34. Super deal - Venture Capital Perspective
      • Goal - Build a highly profitable, industry dominant company to be taken public or harvested in another way at a high P/E multiple in 5-8 years.
      • Management Team - Well rounded with proven experience in building a company. Team works well together and is led by an industry star. Team must also posses high commitment and integrity.
      • Product - Proprietary product with a sustainable competitive advantage.
      • Market - Clearly identified large and growing market with minimal current and near-term competition
    • 35. Valuations- What is a Fair Deal?
      • Not So fair Deal
      • Current Revenue- 1 cr
      • Rev. at 5 years - 15 cr
      • Co. sold for - 60 cr
      • Investment made 2 cr
      • VC stake 60%
      • VC return 36 cr
      • VC return 18 times
      • Not So fair Deal
      • Current Revenue- 1 cr
      • Rev. at 5 years - 15 cr
      • Co. sold for - 60 cr
      • Investment made 2 cr
      • VC stake 15%
      • VC return 9 cr
      • VC return 4.5 times
      Co. grew by 15 times, VC got 18 times Co. grew by 15 times, VC got 4.5 times
    • 36. Valuations- What is a Fair Deal?
      • High sales multiple
      • Investment made 20 cr
      • Rev. at 5 years - 15 cr
      • Revenue Multiple 10
      • Valuation 150 cr
      • VC stake 40%
      • VC return 60 cr
      • Low Sales Multiple
      VC return of 3X, not enough Again, VC return not enough Investment made 10 cr Rev. at 5 years - 30 cr Revenue Multiple 2 Valuation 60 cr VC stake 40% VC return 24 cr
    • 37. Stake and Investment Lifecycle What do we need to optimize? Size of the circle or Promoter Stake?
    • 38. Valuation Soft Parameters ‘ We want to raise money and hire some people and build the product. Of course, we will start with market research’ ‘ We have burnt the midnight oil for last two years to research this need, built the product and have left our jobs a few months ago because we just had to get started’
    • 39. Valuation Soft Parameters “ We will hire a sales head as soon as we get set. We don’t mind even hiring a CEO” ‘ Here is the Sales Head, my co-founder, and I remain the CEO till the company is large enough to attract a professional ’
    • 40. Deal Structuring
    • 41.
      • Types Of deals
        • Startups
        • Fresh Equity – Growth Capital
        • Buyouts
        • Leveraged Buyouts
      • Issues
        • Performance clause
        • Dilution
        • Exit Scenario
        • Taxation Issues
      Investment Deal Structures
    • 42.
      • Startup Structure
        • Startup aims to raise ~ USD 1 Crore
        • Proposal
          • VC contribution ~ INR 1 Crore for 40% stake
          • Entrepreneur ~ 60% of share for idea, execution and delivery
      Deal Structure
    • 43.
      • Risk faced by VC/ Investor if agreed to this this structure
        • Split of proceed if venture fails
        • Split of proceeds if venture succeeds
        • Investor IRR
        • Good faith investment from entrepreneur : Skin in the game
        • Clause for staying in the venture : vesting
      Deal Structure
    • 44.
      • Proposed structure from PE/ VC player
      Deal Structure Debt Investor Entrepreneur Debt INR 50,00,000 $0 Preferred Stock INR 44,00,000 Common stock $0 60 shares @ INR 10000 per share (60% stake with Investor) INR 6,00,000 - 40 shares @ INR 10,000 per shares (40% with Entrepreneur) - INR 4,00,000 1,00,00,000/- INR 4,00,000/-
    • 45.
      • ROFR : Right of first refusal
      • Tag along rights : protection of minority share holder
      • Drag along rights :
        • Drag Along : majority share holder Scenario (Protection to Majority)
        • Drag along : minority share Scenario (Protection to Minority)
      Protection Rights
    • 46.
      • Management support or back seat driving
      • Later stage valuation issues
      • Management remuneration : too much or too less
      • Performance clause : too much equity???
      • Managing performance cycles
      • Exit points
      • Irrational exuberance
      Conflict : Post Investment
    • 47. Case Study: MMT
    • 48. Make My Trip Financing Rounds
      • $1 million in the seed round (eVentures)
      • $10 million in Series A (SAIF partners)
      • $13 million in Series B (SAIF Partners, Helion and Sierra)
      • MMT closed Series C investment of $15 million from Tiger Fund and the three existing venture capital investors – SAIF Partners, Helion Venture Partners and Sierra Ventures
      • $70 million raised in IPO
    • 49. Make My Trip Ownership

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